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Monday, August 27, 2012

Dancing on the Grave of the Keynesian System

Dancing on the Grave of the Keynesian System

Gary NorthThe collapse of the
Soviet Union in December of 1991 was the best news of my lifetime. The
monster died. It was not just that the USSR went down. The entire
mythology of revolutionary violence as the method of social
regeneration, promoted since the French Revolution, went down with it.
As I wrote in my 1968 book, Marxism was a religion of revolution, and Marxism died institutionally in the last month of 1991.
Yet
we cannot show conclusively that "the West" defeated the Soviet Union.
What defeated the Soviet Union was socialist economic planning. The
Soviet Union was based on socialism, and socialist economic calculation
is irrational. Ludwig von Mises in 1920 described why in his article, "Economic Calculation in the Socialist Commonwealth."
He showed in theory exactly what is wrong with all socialist planning.
He made it clear why socialism could never compete with the free
market. It has no capital goods markets, and therefore economic planners
cannot allocate capital according to capital's most important and most
desired needs among by the public.
Mises's argument was not taken
seriously by the academic community. Socialism was so popular by 1920
among academics that they did not respond to Mises for over 15 years.
When finally one major economist, who really was not a major economist,
but was simply a Polish Communist, wrote a response to Mises, it got a
great deal of publicity. His name was Oscar Lange. He was a hack. He
taught at the University of Chicago. He had no theory of economics.
Immediately after World War II, he returned to Poland, renounced his
American citizenship, and became a major Polish government bureaucrat.
He was Stalin's hand-picked first Polish ambassador to the United
States. He was a Marxist. He was a Communist. He was a hack. He spent
his career with his finger in the wind, seeing which way it was blowing.
As for his critique of Mises, Poland never adopted his so-called
practical organizational answer to Mises, and neither did any other
Socialist Commonwealth nation.
So, the only major supposed
academic refutation of Mises was made by a hack who switched sides to
Communism when he got a better offer. Yet he was heralded as a brilliant
economist because he had supposedly refuted Mises. The academic world
never admitted what Lange was, which was a hack Communist. It never
admitted that no socialist nation ever implemented his supposed
alternative to the free market system.
The academic world simply clung for over 50 years to his completely
hypothetical alternative to free market capital allocation. The
academic world would not learn the truth.
Finally, when it became clear in the late 1980s that the Soviet economy was bankrupt, a multimillionaire socialist professor named of Robert Heilbroner wrote an article, "After Communism," for The New Yorker
(Sept. 10, 1990), which is not an academic journal, in which he
admitted that throughout his entire career, he had always believed what
he had been taught in graduate school,
namely that Lange was right and Mises was wrong. Then, he wrote these
words: "Mises was right." Heilbroner wrote the most popular textbook on
the history of economic thought that has ever been written, The Worldly Philosophers.
He became a multimillionaire off the book royalties. In that book, he
did not even mention the existence of Mises. He, too, was a hack -- a
polished hack (though not Polish), but still a hack. Yet he was widely
respected in academia. Academia made him rich.
The academic
community is intellectually corrupt. It goes with fads, and it does not
react to the truth. It suppresses the truth. I realized this very early
in my career, long before I got a Ph.D. The guild in every university
department operates as a guild, and it has no commitment to truth in
matters controversial until one side or the other loses power. When one
side is perceived as possessing power, which the Communists were
perceived as possessing, 1917-1991, there is never any direct challenge
by the academic community. Academia argued about this or that aspect of
the Soviet system which was wrong, which generally related to freedom of
speech. But, with respect to the basic operations of the Communist
economic planning system, there was never anything like a comprehensive
critique of that system, and never did anybody inside the academic
community look for the weakness of Communism in Mises' 1920 article.
The
Soviet Union was always economically bankrupt. It was poverty-stricken
in 1991. It was, in conservative journalist Richard Grenier's
magnificent phrase, Bangladesh with missiles. Outside of Moscow,
Russians in 1990 lived in poverty comparable to mid-19th century
America, but with far less freedom. Yet this was never told to students
during the years that I was in school, which was in the 1960s. There
were a few economists who did talk about it, but they got little
publicity, were not famous, and their books were not assigned in college
classrooms. The standard approach of the academic community was to say
that the Soviet Union was a functioning economy: a worthy competitor to
capitalism.
Paul Samuelson was the most influential academic
economist of the second half of the twentieth century. He wrote the
introductory textbook that sold more than any other in the history of
college economics. In 1989, as the USSR's economy was collapsing, he
wrote in his textbook that the Soviet Union central planning system
proves that central planning can work. Mark Skousen nailed him on this
in his book Economics on Trial in 1990. David Henderson reminded readers in the Wall Street Journal in 2009.

Samuelson had an amazingly tin ear about communism. As early as the
1960s, economist G. Warren Nutter at the University of Virginia had done
empirical work showing that the much-vaunted economic growth in the
Soviet Union was a myth. Samuelson did not pay attention. In the 1989
edition of his textbook, Samuelson and William Nordhaus wrote, "the
Soviet economy is proof that, contrary to what many skeptics had earlier
believed, a socialist command economy can function and even thrive."

The
creator of the so-called Keynesian synthesis and the first American
winner of a Nobel Prize in economics was blind as a bat to the the most
important economic failure of the modern world. Two years later, the
USSR was literally broken up, as if it had been some bankrupt
corporation. Samuelson never saw it coming. People who are conceptually
blind never do.

THE KEYNESIAN ERA IS COMING TO A CLOSE
I
say this to give you hope. The Keynesians seem to be dominant today.
They are dominant because they have been brought into the hierarchy of
political power. They serve as court prophets to the equivalent of the
Babylonians, just before the Medo-Persians took the nation.
They
are in charge of the major academic institutions. They are the main
advisors in the federal government. They are the overwhelmingly dominant
faction within the Federal Reserve System. Their only major
institutional opponents are the monetarists, and the monetarists are as
committed to fiat money as the Keynesians are. They hate the idea of a
gold coin standard. They hate the idea of market-produced money.
There
was no overwhelming outrage among staff economists at the Federal
Reserve when Ben Bernanke and the Federal Open Market Committee cranked
up the monetary base from $900,000,000,000 to $1.7 trillion in late
2008, and then cranked it up to $2.7 trillion by the middle of 2011.
This expansion of the money supply had no foundation whatsoever in
anybody's theory of economics. It was totally an ad hoc decision. It was
a desperate FOMC trying to keep the system from collapsing, or least
they thought it was about to collapse. The evidence for that is
questionable. But, in any case, they cranked up the monetary base, and
nobody in the academic community except a handful of Austrians
complained that this was a complete betrayal of the monetary system and
out of alignment with any theory of economics.
The Keynesians are
eventually going to face what the Marxists have faced since 1991.
Literally within months of the collapse of the Soviet Union, when
members of the Communist Party simply folded up shop and stole the money
that was inside the Communist Party coffers, any respect for Marxism
disappeared within academia. Marxism became a laughingstock. Nobody
except English professors, a handful of old tenured political
scientists, and a tiny handful of economists in the Union of Radical
Political Economists (URPE), were still willing to admit in late 1992
that they were advocates of Marxism, and that they had been in favor of
Soviet economic planning. They became pariahs overnight. That was
because academia, then as now, is committed to power. If you appear to
have power, you will get praised by academia, but when you lose power,
you will be tossed into what Trotsky called the ashcan of history.
This
is going to happen to the Keynesians as surely as it happened to the
Marxists. The Keynesians basically got a free ride, and have for over 60
years. Their system is illogical. It is incoherent. Students taking
undergraduate courses in economics never really remember the categories.
That is because they are illogical categories. They all rest on the
idea that government spending can goose the economy, but they cannot
explain how it is that the government gets its hands on the money to do
the stimulative spending without at the same time reducing spending in
the private sector. The government has to steal money to boost the
economy, but this means that the money that is stolen from the private
sector is removed as a source of economic growth.
The Keynesian
economic system makes no sense. But, decade after decade, the Keynesians
get away with utter nonsense. None of their peers will ever call them
to account. They go merrily down the mixed economy road, as if that road
were not leading to a day of economic destruction. They are just like
Marxist economists and academics in 1960, 1970, and 1980. They are
oblivious to the fact that they are going over the cliff with the
debt-ridden, over-leveraged Western economy, because they are committed
in the name of Keynesian theory to the fractional reserve banking
system, which cannot be sustained either theoretically or practically.
The
problem we are going to face at some point as a nation and in fact as a
civilization is this: there is no well-developed economic theory inside
the corridors of power that will explain to the administrators of a
failed system what they should do after the system collapses. This was
true in the Eastern bloc in 1991. There was no plan of action, no
program of institutional reform.
This is true in banking. This is true in politics. This is true in every
aspect of the welfare-warfare state. The people at the top are going to
be presiding over a complete disaster, and they will not be able to
admit to themselves or anybody else that their system is what produced
the disaster. So, they will not make fundamental changes. They will not
restructure the system, by decentralizing power, and by drastically
reducing government spending. They will be forced to decentralize by the
collapsed capital markets.
When the Soviet Union collapsed,
academics in the West could not explain why. They could not explain what
inherently forced the complete collapse of the Soviet economy, nor
could they explain why nobody in their camp had seen it coming. Judy
Shelton did, but very late: in 1989. Nobody else had seen it coming,
because the non-Austrian academic world rejected Mises's theory of
socialist economic calculation. Everything in their system was against
acknowledging the truth of Mises's criticisms, because he was equally
critical about central banking, Keynesian economics, and the welfare
state. They could not accept his criticism of Communism precisely
because he used the same arguments against them.
The West could
not take advantage of the collapse of the Soviet Union, precisely
because it had gone Keynesian rather than Austrian. The West was as
compromised with Keynesian mixed economic planning, both in theory and
in practice, as the Soviets had been compromised with Marx. So, there
was great praise of the West's welfare state and democracy as the
victorious system, when there should have been praise of Austrian
economics. There was no realization that the West's fiat money economy
is heading down the same bumpy road that led to the collapse of the
Soviet Union.
It was not a victory for the West, except insofar as
Reagan had expanded spending on the military, and the Soviets stupidly
attempted to match this expenditure. That finally "broke the bank" in
the Soviet Union. The country was so poverty-stricken that it did not
have the capital reserves efficient to match the United States. When its
surrogate client state, Iraq, was completely defeated in the 1991 Iraq
war, the self-confidence inside the Soviet military simply collapsed.
This had followed the devastating psychological defeat of the retreat of
the Soviet Union out of Afghanistan in 1989. Those two defeats, coupled
with the domestic economic bankruptcy of the country, led to the
breakup of the Soviet Union.
The present value of the unfunded liabilities of the American welfare state, totaling over $200 trillion
today, shows where this nation's Keynesian government is headed: to
default. It is also trapped in the quagmire of Afghanistan. The
government will pull out at some point in this decade. This will not
have the same psychological effect that it did on the Soviet Union,
because we are not a total military state. But it will still be a
defeat, and the stupidity of the whole operation would be visible to
everybody. The only politician who will get any benefit out of this is
Ron Paul. He was wise enough to oppose the entire operation in 2001, and
he was the only national figure who did. There were others who voted
against it, but nobody got the publicity that he did. Nobody else had a
system of foreign-policy which justified staying out. His opposition was
not a pragmatic issue; it was philosophical.
The welfare-warfare
state, Keynesian economics, and the Council on Foreign Relations are
going to suffer major defeats when the economic system finally goes
down. The system will go down. It is not clear what will pull the
trigger, but it is obvious that the banking system is fragile, and the
only thing capable of bailing it out is fiat money. The system is
sapping the productivity of the nation, because the Federal Reserve's
purchases of debt are siphoning productivity and capital out of the
private sector and into those sectors subsidized by the federal
government.

AFTER THE CRASH
There will
be a great scramble ideologically among economists and social theorist
as to why the system went down, and what ought to replace it. On campus,
there will be no coherent answers whatsoever. The suppression of the
truth has gone on so systematically on campus for half a century, as
manifested by the universal praise of the Federal Reserve System, that
the reputation of campus will not recover. It shouldn't recover. The
entire academic community has been in favor of the welfare-warfare
state, so it will not survive the collapse of that system. It will
become a laughingstock.
It is not clear who is going to come out
the victors in all this. That could take a generation to begin to sort
out. There will be many claimants, all pitching their solutions, all
insisting that they saw the crisis coming. But that will be hard to
prove for anybody except the Austrians.
This is why it is important that people understand what is wrong with the prevailing system, and that they say so publicly.
This
is why the Christian churches will not have much of a say in any of
this, because the churches, and Christianity in general, have had
nothing independent to say about the development of the welfare-warfare
state.
The analysts with the best arguments are the Austrians. As
to whether they are going to be able to multiply fast enough, or
recruit students fast enough, or train them fast enough, with some of
them going into positions of authority, is problematical. But we do know
this: there has been no systematic criticism of Keynesian theory and
its policies except by the Austrians over the past 70 years. Only the
Marxists gave comparable criticism, and their ship went down in 1991.
Keyynesians
talk to each other. They do not seek converts. They do not think they
need to. Austrians, being in a small minority, see to persuade
non-Austrians. Keynesian economists get tenure for writing gibberish and
including meaningless formulas that begin by assuming away reality.
Austrians begin with reality: individual human action. Keynesians, when
writing for the public, offer conclusions, not explanations. Austrians
seek to explain their position, since they know the public is unfamiliar
with the fundamentals of Austrian economics.
In a time of
breakdown, Austrians will explain why it happened, and pin the blame on
Keynesians: "Their system failed. They had control ever since 1940."
Keynesians will pin the blame on Keynesians who did not go far enough:
"more of the same." We see this already Krugman vs. Bernanke.
Which version will the public be ready to believe in a crisis? In the
late 1930s, we found it: the Keynesians, who blamed the free market, not
the neoclassical economists. "The present system basically OK. We just
need more time." Keynesians will say this: "The present system is
basically OK. We just need more time."

HOUSEBROKEN AUSTRIAN ECONOMISTS
The battle will be fought and won outside of academia. Here is where Austrians must learn to do battle.
Inside
academia, to gain tenure, every assistant professor must go through the
motions of genuflecting in front of the Keynesian altar. After they
gain tenure, most anti-Keynesians cannot break the habit. They sugar
coat their criticisms of Keynesianism. They play the role of loyal
opponents. This even include some Austrians -- those who are appalled by
the rhetoric of the Mises Institute and Lew Rockwell.com. They are
housebroken.
I recall one academic Austrian economist who told me
that I am far too dismissive of Keynesianism, and far too contemptuous
in my rhetoric. "You just can't say such things!" he told me, not
grasping his grammatical error. I responded: "Yes, I can. And I do."
That was in 1992. He has not changed. Neither have I.
We have
different audiences. He teaches 130 students, three days a week, eight
months a year, in a government-funded minor university with no clout
within the economics guild. I have 120,000 people on my mailing lists,
70,000 of them five days a week, plus readers on Lew Rockwell.com two
days a week, 52 weeks a year. I can play hardball with Keynseain twits.
He must guard his words so as to curry favor with those whose opinions
count in academia. He has spent his career looking over his shoulder at
Keynesians, who exercise power in all of the social science academic
guilds, by whose rules he must play as an outsider who is barely
tolerated inside the economics guild. I have spent mine telling the
crowd that the emperor has no clothes, and that his tailors are mostly
Keynesians, with a few montarists pretending to hem the invisible
garments. I do not abide by the rhetorical rules -- "gentle, be gentle"
-- that Keynesian academics impose on their critics inside academia.
"You sit in the corner and wait for your turn. You will get your 15
minutes. Be polite when you get your turn." That is not my style.

CONCLUSION
I
offer this optimistic assessment: the bad guys are going to lose. Their
statist policies will bring destruction that they will not be able to
explain away. Their plea will be rejected. "Give us more time. We just
need a little more time. We can fix this if you let us get deeper into
your wallets."
In the very long run, the good guys are going to
win, but in the interim, there is going to be a lot of competition to
see which group gets to dance on the grave of the Keynesian system.
Get out your dancing shoes. Keep them polished. Our day is coming.